Housing starts highest in more than four years

October building permits for single-family homes up 2.2%

WASHINGTON (MarketWatch) — Construction on new homes rose in October to the highest rate in more than four years, government data showed Tuesday, in another sign of a strengthening U.S. housing market.

Housing starts rose 3.6% last month to a seasonally adjusted annual rate of 894,000, the highest rate since July 2008, the U.S. Department of Commerce reported. Starts are up 42% from last year, though the rate remains far below a bubble peak of almost 2.3 million in 2006.

Getty Images

Construction workers build a new home on October 24, 2012 in Miami, Florida.

“The October report is very solid and further supportive of the view that we are in the midst of a strengthening housing recovery,” said Michael Dolega, an economist with Toronto-based TD Bank Group.

Economists polled by MarketWatch had expected a decline in housing starts to a rate of 825,000 from an original estimate of 872,000 in September, due in part to disruptions from Hurricane Sandy. See economic calendar.

However, Sandy had a minimal effect because hit a relatively small portion of the country and only at the end of the month, government analysts said. By region, October’s starts fell by 6.5% in the Northeast and by 2.5% in the South, while rising 8.9% in the Midwest and increasing 17.2% in the West.

Meanwhile, building permits, a sign of future demand, hit a rate of 866,000 in October, down 2.7% from September, but up 30% from the prior year. Permits for single-family homes rose 2.2% in October to an annual rate of 562,000, while permits for structures with at least two units fell 10.6%.

Housing adding to economic growth

The surprisingly strong report led analysts with Macroeconomic Advisers, a St. Louis-based research firm, to raise their estimate for economic growth in fourth quarter by one-tenth of a percentage point to 1.3%.

“Single-family housing starts and permits were above expectations for October, suggesting more residential investment in the fourth quarter,” Macroeconomic Advisers analysts wrote in a research note.

Housing construction will “add modestly” to economic growth for the next two quarters, analysts at New York-based RDQ Economics wrote in a research note.

“However, with residential investment’s share of GDP at 2.7%, which is only half the share seen over the decade prior to the financial crisis, the impact on growth is likely to be only moderate,” according to RDQ analysts.

Housing gaining strength

Tuesday’s report is the latest data showing a housing market gaining strength. Home prices are on the rise. Also, existing-home sales are up nearly 11% from last year, while sentiment among home builders stands at the highest in more than six years, according to reports released Monday. Read more on home sales.

While permits declined in October, they are up 30% from last year — permits rose 27% for single-family homes and a whopping 41% for structures with at least five units. Meanwhile, starts for single-family homes are up 35% from last year, while starts for structures with at least five units are up 63%.

With the strengthening market, home-builder stocks have enjoyed large gains over the past year. Shares of both Meritage Homes
MTH, +0.38%
and KB Home
KBH, +0.13%
have just about doubled over the last 12 months.

Indeed, record-low interest rates and an economy that is adding jobs are supporting the housing market. However, while low rates are attracting some buyers, borrowers still face tight credit conditions.

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